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Psst! Wanna Sell Your Car?

Don't let Mr. Market tell you what your stock is worth.

That new car (and its smell) will lose up to 25% of its value the minute you drive it off the lot.

Ordinarily, a financial writer will use such a statistic to encourage you to avoid investing in depreciating assets. Physical objects such as cars lose value over time. Investments in land, housing, stocks, and bonds increase in value over time. But I will argue that car buying is a lot like stock investing. Stay with me through this lesson on intrinsic value (and just a few more car references).

Stock-car pileupBetween May 9 and June 13, the Nasdaq lost 12% of its value. Dow and S&P 500 stocks fared almost as poorly, with those indexes falling 8%. The monthlong selling spurt vaporized sizeable chunks of companies from A (Apple Computer(NASDAQ:AAPL)) to Z (ZhoneTechnologies(NASDAQ:ZHNE)). Here's a sampling of companies that declined during that time:

Company

Change

Apple

(18%)

Boeing(NYSE:BA)

(12%)

Caterpillar(NYSE:CAT)

(18%)

Dow Chemical(NYSE:DOW)

(14%)

ExxonMobil(NYSE:XOM)

(11%)

Ford(NYSE:F)

(7%)

Zhone Technologies

(19%)

If you owned stock during the dread month of May, you probably felt sick to your stomach as your portfolio's value plunged. You might even have beaten yourself up over not having "sold in May and gone away," as the market pundits predictably remind you every year. And although the markets have perked up since their June 13 lows, the (low) single-digit gains we've seen since then have done little to ease the pain.

It's at times like these -- when you're staring at a stock portfolio still tinged heavily red -- that you might want to remember the new-car-buying experience. (Still with me for this analogy? Good.) One fine day, you stroll over to your local Toyota dealership and plunk down $20,000 on a new car. You drive it home, and no sooner have you parked it in your driveway than your neighbor, Clyde, walks over and offers to take the car off your hands for $15,000. You're shocked. You're disgusted. You're enraged.

Sure, the Kelley Blue Book says your car is now worth $15,000, but that doesn't mean you're going to let silly old Clyde have it for that price. It's a perfectly good car. It'll probably last you 10 years or more, assuming you don't decide to trade it in. If Clyde wants to buy an hours-old car for $15,000, let him find some other sucker.

Price vs. valueI know there are big differences between stocks and cars. Stocks, on average, have been increasing in value at roughly 10% annually for the past century. And cars depreciate in value as newer models hit the market, but does that new car of yours really lose 25% of its value in a day? No way.

The same thing goes for your stocks. As Warren Buffett wisely once said, "Price is what you pay. Value is what you get." Whether it's a car falling 25% or Apple falling 18%, the value of the asset doesn't necessarily change just because the price tag does.

Every asset has an intrinsic value. A car's value consists of its ability to get you from Point A to Point B reliably (and without guzzling too much gas). A stock's value consists of the ability of the underlying business to generate cash flows -- profitably -- for the foreseeable future. How much Wall Street is willing to pay for a stock -- or how much Clyde is willing to pay for your car -- has absolutely nothing to do with worth.

Stocks on saleSo don't fear a falling stock market. You are no more obligated to sell your stocks than you are to sell your car. On the contrary, if you bought your stocks prudently in the first place and knew what they were worth when you bought them, you might even want to buy more when the price falls. Lending an ear to Mr. Buffett once more, we hear him advise us to "Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it."

Profit from Folly, indeedWe Fools just love that last Buffett quote. In fact, it's precisely what we aim to do in our Motley Fool Stock Advisor newsletter service.

We spend countless hours examining the universe of possible investments, and only after we have a firm grasp on their intrinsic value do we recommend a stock to our members. When the stock's price goes up, we cheer (duh). And when the price goes down -- and as long as the company's intrinsic value hasn't changed for the worse -- we urge members to buy more.

The key, of course, is to know how much a stock is worth. If that's something you'd like to learn, then you're in luck. We just wrapped up a two-month examination of each and every stock in our Stock Advisor portfolio. You can see the values we've worked up right here. The price of admission: free.

Fool contributorRich Smithdoes not own shares of any companies named above. If he did, he'd have to tell you so.Fool's honor. Dow Chemical is an Income Investor recommendation.

Author

I like things that go "boom." Sonic or otherwise, that means I tend to gravitate towards defense and aerospace stocks. But to tell the truth, over the course of a dozen years writing for The Motley Fool, I have covered -- and continue to cover -- everything from retailers to consumer goods stocks, and from tech to banks to insurers as well. Follow me on Twitter or Facebook for the most important developments in defense & aerospace news, and other great stories besides.